COMMERCIAL REAL ESTATE: It's an Exciting Time

Column by Michael Bright

By Michael Bright

Posted
9/12/11

People always give a sigh of apology when I say I am in the
commercial real estate business. With the residential markets
taking huge hits and the economy struggling, the assumption is that
commercial real estate is too. For those holding grossly
overvalued, leveraged commercial properties, times are tough.
However, for the commercial broker and investor with their nose to
the ground sniffing for great deals, it is an opportune time. With
tight lending requirements, the term, "Cash is King" has never been
more valid. It truly is an exciting time for commercial real estate
in Denver.

Many commercial properties are facing loan renewal deadlines.
Those who paid a premium five or more years ago are faced with the
reality of not getting a new loan. With lower market lease rates,
banks requiring higher debt coverage ratios, and overall declining
property values, those who leveraged their investment years ago are
left with little to no options today.

This also holds true for developers. A project I am familiar
with in Denver was selling for $225 per square foot five years ago,
but now is selling for as low as $100 per square foot. Banks have
been forced to work with developers to recapture as much capital as
possible and cut their losses. This is great news for business
owners who have been leasing. For the same monthly obligation,
business owners can put a reasonable amount of cash down and take
advantage of incredibly low interest rates and own their space. SBA
financing is a great way to lock cheap money for the next 20 years
without the traditional closing cost fees.

Another example is a property that sold in 2000 for $2.95
million, but was unable to be refinanced last year. A group of
local investors were able to purchase the property this year in a
short sale for $1.1 million in lieu of the bank foreclosing. The
property needs work, but with existing tenancy (which was at 60
percent at the time of purchase), the property was returning a 10
percent CAP rate. Once work is complete and the project is
stabilized, the investors should see returns between 12 percent and
15 percent annually even after the capitalization costs.

With the uncertainty of financial markets and the threat of
hyper inflation in the next couple of years, investment in hard
assets should definitely be considered as part of one's investment
portfolio. In an article written by CoStar's Mark Heschmeyer, he
quotes Andrew Little, an investment banker with John B. Levy &
Co. in Richmond, Va., who said, "Although the downgrade (of the
U.S. debt rating) has made market participants more anxious, and
the immediate impact is widening spreads, the cost of capital for
better quality commercial real estate has not gone up. The bond
market certainly doesn't believe there will be any U.S. Treasury
default, but prospects of continued political gridlock and further
downgrades has investors of all kinds trying to figure out where to
put money," Little said. "Commercial real estate doesn't look too
shabby when compared to many of the alternatives." Mark goes on to
quote Asieh Mansour, Ph.D., and CBRE's head of Americas Research
who says, "While we anticipate continued stock market volatility,
commercial real estate will not fare as poorly because it remains a
preferred asset class, within a well-diversified multi-asset
institutional portfolio."

Be a wise and prudent investor. A trusted advisor has always
told me, "I don't invest in anything I can't sell for $8.95 with
Schwab." Once committed to a commercial asset, it certainly is not
as liquid as a stock trade. However, if done right, it can prove to
be a very valuable return for the future. Look to those who know
and understand the market and seek their advice. Do not invest in
something you don't understand. The last thing you want is to be
the "one" having to arrange a short sale or face foreclosure down
the road.

A friend and I recently sat down to play a game of Monopoly with
my 9-year-old son. My friend has a Ph.D. and I being in real estate
felt confident in our abilities to school my son. My son is
infatuated with Boardwalk and Park Place (who isn't?). He had
successfully purchased Boardwalk, but needed Park Place, which my
friend had already purchased. For 30 minutes he begged my friend to
trade nine of his properties for my friend's one interest in Park
Place. My friend would not trade him because he felt guilty of
taking advantage of such a naive trade. After repeated requests, I
finally encouraged my friend to make the trade, knowing it would
give me the opportunity to teach a valuable lesson to my son.
It took only another 30 minutes (we all know this game has a
painfully long time requirement), but my son successfully purchased
the requisite amount of homes, then two hotels and subsequently
bankrupted my friend first and myself not long after. No lesson in
prudent spending was taught that day, and my 9-year-old has not let
myself, my friend or anyone else within ear shot forget his
victory.

My point is, many have made a lot of money on real estate. Some
make it through wise and prudent purchases and others through dumb
luck (no offense to my 9-year-old). I believe in the real estate
market in Denver. It has weathered these economic times better than
most major cities throughout the country. Be wise, use good
judgment and counsel, and you too can end up winning in the game of
real estate in Denver.